Full transcription: may contain unintentionally confusing, inaccurate and/or amusing transcription errors

Nuno: Episode 7. 

In this episode, we’re gonna discuss news around IPOs, initial public offerings, or exits, as we like to call them. We will be talking about , the de-mystification of venture capital and startups. And finally, we’ll end up with some gadget news.

Bertrand: Excellent Nuno, thank you. 

Let’s start with IPOs and as you say, sometimes we talk about IPOs and we equate that with exit. I think that might be actually  dangerous to think too much as an exit, at least from an entrepreneur perspective. Yes, from a VC perspective, but from an entrepreneur perspective, it’s often a stepping stone, to getting bigger and getting, maybe out of your teenage years, but definitely an exciting time when it happens.

Nuno: Correct. And you get to ring bells and do all sorts of funny things that are interesting. 

Silicon Valley bubble bursts? (02:18)

That said, sometimes reality sets in, which brings us to the first article today, which is the article on Silicon Valley, adjusting to the new reality as a $ 100 Billion evaporates, the Wall Street journal article.

This article goes into quite a lot of detail on the significant haircuts that have happened with companies that have IPOed in the last few years. So companies that have lost a lot of value from their initial public offering price,  and also companies that almost IPOed and manage not to IPO and had significant hair cuts in their private market caps, with the case of WeWork being obviously, probably the most discussed one.

Bertrand: Exactly. I think today in this article, actually the most value lost has been by private companies moving from one private round to another private round instead of an IPO per se.

Nuno: And the interesting thing for me is that public markets, have been incredibly rational. So the question that I’m often asked are we in a bubble? I always say we’re not in a real bubble in the sense of what happened around 2000, because public markets, unlike in the late nineties, public markets have been incredibly rational in their valuation of companies.

And that justifies a lot of the haircuts we’re seeing. It justifies that we’ve had some failed IPOs companies that really didn’t manage to underwrite their IPO, because of that. So for me, public markets have come to the rescue and they are now, effectively pushing back on a lot of the late stage private market valuations, which were, let’s say, rather silly.

Bertrand: Yes, and they have been coming to the rescue and at the same time there’s a question, is that usually 10, 20 years ago companies will have gone public much sooner in the life of the business, and here now, you could argue companies are going public much later, in the life of their business.

So you could argue public markets now have way better tools and ways to analyze a business, because businesses going public are much more mature businesses. So there is less of a bet on the business than before. The bet is not just early on fully done by the private market as always, but even later on, at later stage it’s still being done by the private markets.

And in a way, public markets are not playing that part of the game anymore. They are just accepting companies when they are very mature, very predictable. And as a result, if it doesn’t look like that, not predictable enough, not exciting enough, then I think it’s an easier say for the market to give an opinion.

Nuno: Yes. And there’s this interesting chart at the end of this article that talks about the difference the haircut, on IPO value, versus the valuation of last round of venture capital.

And we’ve had some really significant haircuts, companies like Cloudera, Blue Apron, Dropbox, Domo, Pinterest, and obviously companies that have stayed and remained private, like WeWork and Juul Labs, which have been very, very significantly pushed in terms of their valuation.

Bertrand: And I guess for Juul Labs, given what’s happening, it’s probably even optimistic, that ” only” 14 billion lost in market cap, I think their business model is fully truly at risk, all of it.

Nuno: And the new federal law, I believe, announced that basically demands that you can only sell these products to 21 year olds or older.

Bertrand: Yes. And they also restrict what type of flavors, should be made available. So there are a lot more restriction. But I think this graph doesn’t share the full story. Because if I take a “Blue Apron” for instance, yes, there is some haircut between last round and IPO, but not by much actually, but you could argue this one end up being a big bad story in the public market. Moving from a $ Billion plus initial market cap, maybe even $2 Billion, to less than $100 million today of market cap.

So even as we just said, we talk about public market being mature, realistic, the initial reception to Blue Apron was actually, I would say pretty good. But what happens, the following quarters was definitely a disaster. So you could argue Blue Apron really went public too soon. Their business model was still not clear enough, not valid enough.

Nuno: And although the two of us, we’re not experts in public markets, but obviously we understand the notion of underwriting. And so the propping up of the value when the company actually IPOes is sometimes linked to the institutional investors that are underwriting, or there are behind basically the company going public, unless there’s a direct listing, we’ll come back to that in a second.

So in some ways, the propping up of value doesn’t immediately go away when the company becomes public, because there are retail investors that are coming on to that round effectively. That’s the last round, effectively. And that signal in the market stays there for a few days, we’ve seen. So it’s very customary that you’d do an analysis beyond the first five days of the company being public, one month out, after the first release of earnings, as a public company and a few other options down the road.

So in some ways, the market doesn’t immediately adjust.

Bertrand: Yes. And actually it goes even to the first six months. Because usually you have a lockup, for the first six months of post IPO, of shares, meaning insiders cannot sell their shares during the first six months, at least not in a traditional IPO process. So, that’s also another thing that’s happening.

So it means that usually, the first six months are an early indicator, but nowhere near a clear indicator of what should be the true value of the company and how much supply and demand is truly there.

Nuno: Yes. I think this is good. So I think it’s good news that the public markets are being rational. I think it’s great news that valuations are becoming, I would say, more realistic towards what companies are actually delivering in terms of profitability. the business model. That they’re anchored around and how they make their money. 

A little bit the case around WeWork is that a real estate company, or a tech company? I may think the market has spoken and has sort of said it is real estate, and therefore the multiples that which it trades need to be aligned with that market. So I think this is all great, and positive news.

Bertrand: I agree. I think overall it’s good.  It’s not solving every problem, however. Because you still have probably in a way too much money now in the private markets. Because if the expectation was “easy IPO”, a lot of money needed for a lot of private companies, and now we realize actually maybe not as much money is needed because the most crazy business models are “out” and now it’s more about smarter growth, then what will happen?

A lot of money chasing fewer deals, or a lot of money chasing as many deals, but with less needs in term of financing. I’m not clear how that part of the problem is being solved? It will be actually interesting to see. 

What’s your take on this, Nuno?

Nuno: I think there will be a tremendous reduction in valuations in the late stage and mid stages, that we will see. So I’m not really addressing your question yet, but I do think valuations will need to be pushed back. I think, we will see less and less mega rounds in 2020, very selective mega rounds in private markets, but not the, a little bit the silliness we’ve seen over the last two or three years of, billion dollars here, $5 billion there in private rounds. 

Where will that money go is interesting to me: whether that money will flow even further back to early stage, which is already tremendously swamped space right now, in terms of capital, whether it will go to other varieties of private equities that are not sort of classic venture capital or growth.

But more the buyout space… 

Bertrand: Yes, that’s interesting. 

Nuno: … and roll ups, and areas that are a little bit more typically associated with classic private equity. So I think the money might start searching or going to other places. I do think we’re going to have less mega rounds, and we are going to have more reasonable valuations.

I do think that will ultimately actually ripple down to early stage.

Bertrand: Yes. That’s also my expectation in term of rippling down. As we probably discussed before, it might take a bit to ripple down fully to early stage. I don’t know if it’s six or 12 months at least in the US. I guess it might be early to see it.

Nuno: I think we’ll still see it in 2020. I think we’ll see cheaper early stage. I’ve mentioned this before, I call it the Y Combinator effect. We’ll see where the price caps are on those safe notes, by the end of 2020. 

Bertrand: That makes sense to me. And another point, in this article was interesting that reference to Lime, looking to rely more heavily on debt to fund it’s scooters. I think it’s probably another another trend we will see: more use of debt, where it makes sense. If it’s a debt type of instrument you need to grow your business,  that would be really good actually.

Nuno: And we’ll talk in just a second about hardware IPOs and the difficulty around hardware IPOs, but I do think you’re spot on in that analysis in saying it really doesn’t make sense in particular if it’s very capital intensive your business, if it’s very  linked to physical assets that can somehow be tangibly valued, it makes sense for you to go with other options, and just raising equity doesn’t make the best sense in the world.

Having debt makes more sense in many cases. Obviously the covenants of that are very different than the covenants of equity. And so that will put different pressure on, boards of directors, CEOs, and how they deliver their numbers. And again, that might be a good thing because you’d need to achieve profitability  and actually free cash flow earlier on in the life of the company to really serve that debt at a certain point in time.

Hardware IPOs continue to struggle, but public performance is not always bad (11:53)

So again, I see that as a positive element, and maybe a good segue to talking about hardware IPOs and in particular our friends at Peloton and what’s going on there, NIO and a few other companies that are mentioned in this article by Tech Crunch.

Bertrand: Yes, I think this Tech Crunch article is pretty interesting. It’s highlighting the difficulty of hardware IPO. 

And to be frank, Peloton did a pretty good IPO. I mean they’re one of the biggest ever hardware IPO. Obviously, it was probably not positioned as a hardware IPO, it was probably more positioned as a health and subscription IPO. 

Nuno: Recurring revenues.

Bertrand: Recurring revenues. And to be fair to Peloton, that’s probably mostly what it is or at least that’s mostly how’s the business is perceived from a consumer perspective. Because you subscribe to the service, yes, you can pay for the hardware, but they provide more options to basically get a loan to pay for the hardware.

And I’m sure it’s more and more successful that loan option given the price of the hardware. We’re talking about nearly $3K for a bike, and nearly $4K for a treadmill. So you better get a loan for that. But that connection between hardware plus subscription, I think it’s a very interesting combination, and maybe one of the only combination you can be successful on, these days in hardware.

Nuno: And there has been a little bit of debate on their magical churn numbers, right? Their churn numbers are exceptional, meaning very positive, very low, low, low churn. And at the same time, as people are questioning their metrics and what they’re actually reporting is turn, and somewhere in there will lie the truth.

It is a phenomenal case of a full stack deployment with hardware, with services on top of it where there is recurring revenue, but at the same time,  the consumer guy in me is like, these churn numbers are just too good to be true. There’s something going on here. With how people are actually canceling their subscriptions, or not canceling them, and how they’re committed to the service over the long term.

And maybe it is an effect that we’ll start seeing beyond one year churn, but still their one year churn numbers also look great. So what do you think is happening there? Are there some little tricks going on, or are there numbers just phenomenal, but the market is not seeing it yet?

Bertrand: Good question. So actually I have a Peloton at home for two years maybe.  

Nuno: And you’ve subscribed to the service?

Bertrand: So I keep subscribing, and I can see that when you spend so much money on a bike, you definitely feel bad about stopping your subscription. So I’m sure that’s helping some of their subscription numbers after a year, even after a year, even after two years. So that’s probably one effect: you really truly think twice about canceling, because suddenly, I’m not saying it’s becoming a dead weight. You can probably still, partially use it, but so basic that you will probably not use it, to be fair. So yes, you’re incentivized to keep leveraging in a way your investment, in that bike. 

So that’s one angle. Another angle: I’ve heard that there is actually a pretty strong resell market for the bike.

So I wonder how that market is accounted in term of subscription. Because is the subscription  connected to the iake or connected to the subscriber? I don’t know,.

Nuno: I don’t know either.

Bertrand: But that would be very interesting.

Nuno: Use you as a Guinea pig. You know, if you don’t mind sharing with us, how often do you use it?

Bertrand:  I’ll say two to four times a month.

Nuno: And has that decreased over time? Was that more or less how it started? 

Bertrand: It has moved up and down. 

Nuno: Up and down, but it’s now at its slowest?

Bertrand: No.

Nuno: A little a little bit above lower level, so two to four times a month, and you pay the subscription.

40 bucks a month.

40 bucks a month. So what would make you stop using it altogether? The subscription, let’s say cancel subscription.

Bertrand:  If I’m using it once a month, I think it will start to be expensive to pay your 30 min of lesson 40 bucks. And obviously if you don’t choose it in a month that would be a much bigger problem. 

To be clear, I enjoy the bike, I tried multiple bikes and equipment. It’s by far the best you can find in a market in terms of hardware. And the subscription, the service itself is excellent. I mean the quality of the videos, the training, all of this. It’s not that fun to ride a bike at home and to be able to do that in a relatively funny way, to be clear, I think it’s a master class in execution and launching a new concept.

Where I’m more worried for them is how do they really truly be able to expand beyond bikes. And I know they’re expanding, but I mean in deliveries but still delivering the value. Because I have a treadmill, an old school treadmill, and I have no interest whatsoever to go to a Peloton. I simply don’t see the value for my treadmill.

Nuno: Yes. 

So talking about other hardware IPOs that are also mentioned in the article, obviously Roku has done well. They’ve moved away further and further away from hardware and more and more into content services and this upper layer of being a meta-content provider, effectively.  

Bertrand: I was amazed, I mean we are talking of 10 X gain. That’s fantastic. Insane. I would say. And they’re a very tough spot. Having to compete with Apple TV, with Google TV, with other options.

And so, their transformation because it’s a true transformation, in front of the public market, from a hardware focused company to a service company, has been amazing. And if you look at their margin, it’s actually very interesting. You can see their hardware margin moving from pretty high to 0%. There is no margin there. They are selling their hardware at cost, and they are doing that for one logical reason, is that they want as much scale as they can in term of user base, so that they can increase the value of their service business. And their service business is about selling new subscription to TV service that they don’t develop themselves, as well as advertisement, on top of their service.

Nuno: So Roku has done incredibly well. 

Fitbit sort of semi, not fully saved by by Google and the acquisition. 

GoPro very disappointing. 

So it’s very clear that markets value businesses that are able to go to higher multiples and therefore to go further, further away from the classic one off sale of hardware. One off sale of hardware is very lowly valued, recurring revenues, very highly valued.

And that’s ultimately what’s public markets are reacting to in all these cases.

Bertrand: Yes. And let’s be careful because it just IPO, because if we look at the Samsung and Apple of the world, they still do very well. But how wide is their portfolio is simply not comparable to a Fitbit or GoPro. Fitbit and GoPro are truly point solutions, versus a Samsung or Apple.

So I think that’s also another part of the public market: is that there is prime value to wider portfolio, deep options in term of hardware you sell, in term of true global scale, and in term of not just point solution, but are you truly a niche product or not? And I think in the case of GoPro,  it’s a good product, it’s a great product, but it’s a truly great product for a truly niche market.

Nuno: But I would allege that Samsung, in particular Apple have created things that go beyond just exactly what you said, the one point solutions or even the broad solutions with smart phones, et cetera. They’ve created ecosystems of devices, of connectivity, of content and services on top of it.

 As I said, probably more Apple than Samsung, and that’s still being valued into the stock price today. But at some point, the markets will also look at really how much of all of this is recurring revenue and versus you’re selling an iPhone every year. Because I think  effectively iPhones right now are being valued with a certain cycle of replenishment and recycling.

And at some point in time people are going to look at the numbers and it’s not like Apple selling more iPhones today than it was selling several years ago, so gravity’s going to catch up on on devices sales. 

Bertrand: But actually I would say that’s a good point you talk about this. Because one is, as we know, Apple is also moving to a subscription service business, it’s still small, but it’s moving there. But the other piece is that truly, if you buy an Apple phone or a Samsung phone, you’re going to buy a new one, maybe not in two years anymore like before like the golden years, but after three years, maybe four years. But it’s still definitely something you are going to change over time. 

That was a big issue however, we saw GoPro or a Fitbit: people will keep the same device for five, six, seven years, will never change their GoPro, will never change their Fitbit device.

And that’s the other piece I think in hardware: is that, are you in a space where at least initially people are going to replace every two to three years? And maybe yes, at some point you move to three to four, but if from the get go, you start in a market where you change device, you upgrade device every five to 10 years, that’s a big, big trouble.

If you pick TV for instance, I think the number is seven years, in term of replacement. And I have an example, I bought a tech device for my scale to weight myself. I don’t think I’ve changed in five years, and I have no interest to change in the coming five years. Zero interest, no value for me.

Nuno: Yes. Same here. I think there are devices that you will not need to replace and in effect I’m not sure the providers of these devices then are offering me any services that on top of it that I would be willing to subscribe or pay for beyond just having the device. So the device works fine. I just do it, use it, and it’s fine.

I’m not to booboo anyone, I have now my smart toothbrush from Phillips, and I love the toothbrush, but even the basic mobile app is buggy and it’s just beyond belief that it’s buggy. At this point in time, having buggy software that is just the core of your experience and then asking people, by the way, do you want to automatically replenish your brushes?

No, I don’t. I would like actually my app to work every time to start before I automatically replenish my toothbrushes. Oh, how’d you want me to trust you with automatically replenishing my toothbrushes if my app doesn’t work all the time?

Bertrand: Nuno it reminds me of the app for my car and it’s crazy. Half the time when I start using it, and usually I use it when I want to start my car and use my car: it will ask me to relog again, it will ask me to recheck again some term of service, it will freeze suddenly, it would ask me to confirm I’m not using it while driving.

I’m spending 30s battling with my app for my car, that’s truly insane. And so I think to this point, very few hardware manufacturers have been good at software. And usually it’s probably because they didn’t start with software ever. It’s not an Apple with a tradition of 40 years of software. There is no tradition of software in many of these companies.

For some it’s coming from very low, it has improved over time. I think GoPro and Fitbit, especially GoPro has improved over time. It was pretty poor and now it’s considered pretty good. They made some acquisitions,  they really improved there. But it’s not an easy one and if you don’t have the capacity, the talent, or the investment capacity to build that type of software, that will be trouble.

And as we discussed before in our episode on gen Z, newer generations are going to expect some seriously good app, even if it’s for some hardware and forget about subscription services or additional services if your app doesn’t work well enough.

Nuno: Yes, that’s table stakes. Otherwise you don’t even get to play. 

B2B vs. B2C IPOs (22:49)

Switching to a different type of separation or segmentation of IPOs: B2C versus B2B IPOs, and obviously the sample size is pretty small. We’re talking about 32 technology IPOs in 2018 and 2019. 

Bertrand: Up to May 29 of 2019.

Nuno: I wouldn’t read too much into these numbers, we’ve seen IPOs after that. Sort of the story that’s being pulled here by the top TopTier article is that B2B companies going to being public companies and then keep growing their valuation multiples. And B2C companies don’t get that much higher on valuation when IPO and seem to recover some of that later on. But do lose quite a lot of market cap along the way. 

So what the article seems to be intimating is two fold. One that, maybe, B2C companies are actually valued much closer to their private market valuations, and therefore there’s little upside when they go public. And sometimes there’s downside. 

Whereas with B2B companies, that’s not the case. Or might also intimate that the B2B case in terms of scalability of business model, et cetera, sometimes is more obvious with more cash at the table to fuel sales and marketing and go to market, than it is for B2C where things seem to be a little bit more hit and miss, a little bit more binary: either you do have a lot of great users or you don’t, either you find a business model or your don’t, etc. 

Bertrand: Yes, their numbers are pretty impressive: there is a big gap between the two business models based on this analysis. If we talk about B2C, they saw a multiple difference between the last private round and the market cap at the end of the lockup of 0.7 X, it means a decrease of valuation of 30%.

Nuno: From the last VC round. 

Bertrand: Yes, to end of lockup post IPO. So six months after IPO typically.

Nuno: Half of the valuation versus the IPO valuation. So 1.4 times to 0.7. 

Bertrand: Ah yes exactly, and saw a bump at IPO and then nearly a crash, where if we look at B2B companies it’s much much smoother versus private round of valuation, we are talking about 1.8 X increase of market cap six months after IPO, and this was after a 1.2 X at IPO. And at current market cap we’re even talking about 3.2 X. 

So very very strong constant growth, I think one thing this article is not talking about is: the growth rate of these companies, so that’s one. Two, it’s not talking about the margins of these companies. Three, it’s not talking about the intensity of the competition, and I think some B2C companies  have been facing intense competition: if you take Uber and Lyft for instance, that’s one example among many, but it’s intense competition between these  two companies .

Many of the B2B companies don’t have so much intense competition actually. They might have lower end, “second-tier” type of competitor, but not such intense “market-destroying” type of competition. So my take is that, yes there are a lot of fundamental differences between B2C and B2B. But I think if we look at more clearly the numbers, in margin, in competition, in growth rate, we will see a lot of explanation there about why such a difference in valuation. 

And to go back to your point, I think there has been probably too high valuation in B2C because there was too much request for additional capital, trying to drive as a result higher valuation to basically be able to afford the dilution. Which created a very bad effect of self fulfilling prophecy around: we need more capital, therefore higher valuation, but without a reality check.

Nuno: So a couple of important points. One caveat, this is US and Europe iPOs only . Two , although we’re talking about these differences in valuation, and the line for B2B seems to be a steadier one than for B2C companies. The reality is B2C companies do command higher valuations on average than B2B companies. That’s what we’re seeing as well in this data set. And three, as we mentioned before, this data set is likely not super representative. It is what it is with the timeline that we have.

 In terms of conclusions of what I take away. I do think B2C has some complexities and analysis around business model. You talked about Uber and Lyft that have had significant haircuts as public companies : $32 billion plus for Uber, and over $10 billion, I believe for Lyft, if I’m not mistaken. 

And so at the end of the day, I think what’s being questioned here is a little bit, the business model, which is the unit economics that they were showing when they became public companies were based on a lot of estimates on market behaviors that have since not fully manifest themselves.

So somehow the unit economics don’t seem to quite fit the market. And at some point in time, analysts are like, well, this doesn’t really work. Your unit economics actually seem great on your prospectus, but they don’t seem great as a public company, and so you’re not worth that much. 

And in B2B companies, because of the nature of the beast, because it is a highly monetized engine, right? That’s B2B, you are selling to companies, it’s maybe easier to analyze those unit economics, and really nail the business model and have less surprises even when you’re already a public company.

Bertrand: Especially since many of the B2B companies going public are SaaS companies and in the past few years, analysts on wall street have really learned how to understand and value properly SaaS companies. I’m saying last few years because it was not true in 2010, it started to be true in 2015 but I think in 2019 there is truly a deep understanding there about this business model, how they work. So a lot of discipline at every level from companies to analysts in understanding these companies and going beyond any hype I would say.

Direct Listings (28:33)

Nuno: So, last article we want to talk about today is “direct listings” , and the proposed, changes by the New York Stock Exchange to slightly make direct listings more appealing by allowing there to be actual capital raise in the direct listing, which is not allowed. And I believe you were telling me Bertrand that this was not accepted by the SEC under its current proposal, but there’s still some discussions ongoing. 

Bertrand: Yes, there’s definitely some discussion ongoing.

So, it was not accepted by the SEC, they are going to refile again some new proposal , and the big change is around raising fresh capital. So direct listing is a new way to do IPO, it was started by Spotify , Slack followed up. And it’s a way where you don’t sell a new offering, you are just letting your existing investors sell at the time of the IPO. So interestingly enough it means there is no lockup because immediately at IPO time, every insider can sell their shares, but at the same time the company itself is not profiting per se because there is no offering from the company itself , which obviously create big constraint because it means that only companies that don’t need the money  can do that.

And what type of companies don’t need the money? Only two types: ones that are extremely profitable, or those that raise too much money before, and don’t want another dilution following a new raise of capital. So these new rules will help any company do a direct listing and it’s pretty exciting, because the old ways of doing IPO, which is what happens 99% of the time, really generate a lot of inefficiencies in the process. Great fees for the bankers for sure, great benefits for companies who benefit from the allocation at IPO, but at the same time it’s actually not truly representative of the market needs.

So I’m personally a big fan of direct listing I think it’s where’s the world is probably going to be, but let’s see how it expands because at some point I can also see the perspective of how do you protect smaller investors in case of direct listings that might not be optimized for them.

Nuno: Yes. And  there’s always been this ongoing fight between private market investors, particular the VC world, and the public market space.

Everyone has always characterized it as Silicon Valley versus Wall Street. Maybe that’s an oversimplification of the discussion. The world has changed quite a bit since then. We have obviously a lot of laws that have been enacted to allow smaller investors to put money: the startup act back then,  and a few other laws that have been enacted to allow for an easier involvement of private investors, even smaller private investors earlier into the life cycles of companies before they’re public companies.

So maybe those lines at some point will become, more and more blurred.

Bertrand: I hope so, I think some of these laws are really unfair to people who cannot invest because they’re not considered accredited investors. I think it’s actually very bad, and especially when you know that a lot today of the value creation happens in the private market, not in the public market anymore. So yes, I’m very excited that some of these changes are happening, but I still think more needs to be done from direct listing to laws that are even more friendly to smaller investors.

Nuno: And the investor in me is a little bit in a fight in saying it’s good that we let more and more people invest. But at the same time, I see a lot of behaviors in the market, even by investors that are accredited, that are running smaller funds,  where their adequacy to being investors is at least questionable. And I’m probably being nice here, where due diligences on companies are not really done. So the investor in me, that’s been doing this for a while, thinks opening the floodgates is not necessarily going to solve all the problems. We’ve had a lot of stabs at this issue with crowdfunding being one of them, with a lot more angel capital into the market.

And it feels to me sometimes it’s a little bit like fool’s gold. More and more people deploy capital earlier, and in some ways they don’t understand portfolio management, they don’t understand what due diligence looks like. They don’t understand that most of their investments will only really mature even if they’re successful 7 to 10 years out. So I think there’s a lot of things that are happening in the market, even for people that are accredited investors today, that lead me to believe that opening the floodgates the way that they’ve been opened might not be the right solution either. So there needs to be something in between. and I do think one of the core missions of the regulators in this case is to protect smaller investors and smaller retail investors.

Bertrand: Yes, I think there is a question of protection. At the same time it’s very clear that there has been less and less IPOs over the past 20 years. There are less public companies overall on the stock exchange for the past 20 years. And again most of the value creation has happened while companies were private. So So that means that retail investors have not been able actually to benefit from value creation. That means that it’s becoming more and more difficult to create companies that can go public. So I think we still have an issue to face around what’s happening with the private market and the public market, and  the combination of the two is not working as well as expected. I mean for instance you talk about 7 to 10 years for the value creation, in the past it was shorter to bring a company public and going IPO. If I take startup employees, they are still on a 4-year vesting plan, and after that what happens after these four years when they want to move on ? 

Nuno: They normally have 90 days to exercise their options if they go to another company, yes . 

Bertrand: Exactly, and how do you exercise if you do not have enough money on the side, if you are lock up for the next six years and you cannot sell these shares. So I think it’s also raising questions around secondary markets, secondary private markets, how do we open that more? Thare are a lot of questions but that game of extending the life of how long you stay private  is creating a lot of issues that are not being addressed: from retail investors to employees of startups.

 Nuno: I do think that there’s a lot of unintended consequences in a lot of these things that are being done, and if we go back to the movement around angel investing and super angel investing, crowd funding, the reality is: it made life, to be honest, noisier in early stage but at the same time, it’s creating a cherry pickers market for venture capital firms.

And there’s this illusion that angels have changed everything. They’ve not, right. Angels, have fueled very early stage investing , sometimes, with huge losses to themselves, because these companies still then don’t meet the requirements of getting full on institutional capital, which they do need to raise at some point, from whatever source.

So again, I understand the point that’s being made of giving, you know, retail investors, earlier access to private companies, but we just talked about private market valuations are actually very high.  And there might be a bubble there. And so how do you really make sense of all of this, and how do you make sure that there aren’t people just putting their savings because they’re like, if I give $10K to these guys, these guys are going to be worth, a hundred X, to a thousand X, when the odds that the company will be worth a hundred X, to a thousand X, they might as well go and gamble on the roulette. Right? They do have much better chances of winning.

Bertrand: Actually , you know the better rules should be, not on how much money you have as a personal fortune, or how much money you earn, but about financial literacy. Like on Wall Street, why don’t we ask some level of financial  literacy, and test investors and business angels on that, and all of what you are raising could be part of that test. And I’ve seen actually some proposal in that sense, and for me that makes a lot of sense.

Nuno: It’s interesting because we can, and we can do, a mini CFA requirement for people to be able to invest their hard earned money to companies. But the reality is, when you’re investing in early stage, as we know, this is an athlete’s game, right? It’s not a financial jock game. It’s not about spreadsheets.

It’s not about unit economics, looking at P&Ls balance sheets and making a call on the company because there’s nothing Going on right now. You’re looking at technologies, you’re looking at products, you’re looking at teams, you’re making a call of all of this stuff, put together And that’s why the venture capital profession is not an easy one because it requires a lot of learning. in very short periods of time. It requires a lot of pattern recognition. And so again,  I have this fundamental doubt. I don’t want to make life more difficult for people to be able to invest their money into early stage, but I do feel the onus of really making decent investments in being fully in understanding of the decision that you’re making, of putting money, your capital into something, is such a high bar that I’m not sure opening up is the right solution.

Apple’s not so secret satellite team (37:32)

Bertrand: Hi Nuno, that’s our favorite gadget section , and let’s start with Apple’s secret team, working on satellites. 

Nuno: Not so secret.

Bertrand: To beam data to devices. So I think what they are reporting is standard business practice by any company of Apple’s size, which is to have multiple teams working on different type of devices and projects and services. So for me it’s perfectly normal that they have multiple things in parallel and they are trying a bit of everything.

The big difference with Apple versus some other companies, that they might try a lot of things in the lab, that doesn’t mean they are going to launch it. They are very careful about only launching what they see as truly transformative, and technologies that are going to stay there for a decade or more. So I’m not sure I would read too much into it: it’s part of making sure you try everything, you’re up to date. 

But at the same time it’s obviously very interesting. Apple is, at least by profits, the largest concept manufacturer in the world, the biggest company in the world, or one of the biggest by market cap. So everything … anything they do can have impact on the industry. And the iPhone is their best seller. So anything that touches the iPhone, could be big. And if we talk about satellite data potentially replacing, but my guess is that it’s more enhancing whatever data you might have from your carrier.

What’s your take on this Nuno?

Nuno: So I wouldn’t read too much into it, but coming from a different angle. I think having small number of people on this seems to lead us to believe that this is a skunkworks project. But at the same time, we know that the iPhone was started by 10 engineers, the first 10, as they call it.

So at the end of the day, maybe, there is something important going on in this team and what they’re trying to do. They’re not reading so much into it that I would come back to, is precisely this whole notion: they want to replace telcos, et cetera, through satellite. Seems a little bit …  

Bertrand: Hopeful. 

Nuno: Hopeful to say the very least, a little bit naive in some ways. Satellite still has limitations that we know of, it will still have limitations. It’s not magical in terms of coverage.  

Bertrand: Especially inside buildings.

Nuno: In particular indoor, it still has some latency issues that would need to be solved There’s a lot of issues with satellite communication that would need to be solved, for the bandwidth that we need to have, and for the performance we need on these networks, that I think you can’t just put to the side. 

So,  the fact that they’re looking at satellite technology, might mean that there is something linked to communications that might mean that there’s something linked to location and location based services. We’ve talked about GPS in the past, the two of us, Bertrand, and the fact that it’s not really the solution to all the problems. And obviously there’s a lot of countries with different solutions out there right now.

So there might be something around location based services and the use of satellites for that, there might be the enriching of services through satellite. So there’s a lot of reasons why Apple would be spending time on satellites, even if at some point they decide to launch their own constellation, which they would have plenty of money to do. 

Bertrand: Indeed, a few constellations 

Nuno: A few constellations if they want.

It doesn’t necessarily mean they’re trying to replace carriers or telcos. It just means that they’re exploring what they would do with satellite technology.

Bertrand: Yes, for me what was interesting reading this article was that feedback, old school feedback about, “You know what, there are prior failures of satellites constellation, like Iridium, Globalstar, Teledesic”. So that’s all constellations that were launched in the 90s and let’s think back 30 years ago, the 90s.

You didn’t have the same capacity to launch satellites cheaply. Costs were much, much more expensive at the time, thanks to SpaceX. 

Two, there were very few smartphones in the world, so the benefits of having always on voice or data were not clear for people at the time. 

Three, of course, the cost of every device: either satellite or handheld device, were crazy expensive because you didn’t have the same electronics industry in the 90s.

So to keep looking at some lessons from failures 30 years ago in the tech industry, for me doesn’t make sense. 

So that’s something we want to be careful. It’s not because 30 years ago, stuff happened, it’s still relevant today  for the analysis, so I’m a bit more bullish. 

And the other piece that is clear for me is that Apple also has to invest just from the perspectives that Amazon and SpaceX,  have very clear programs. And SpaceX has started deploying it’s constellation. So a company like Apple cannot stay put when some potential very big competitors, deep-pocketed ones like Amazon, are investing significantly in satellites. So at the very least you have to prepare some potential defensive moves,  and potentially, it could be even offensive.

Nuno: Yes. And in the article, there is also mentioning that this effort seems to be led by Michael Trela and John Fenwick, who came from Google when before had been at Skybox Imaging, which was a satellite imaging company that sold to Google, and Google’s obviously has satellite and spacecraft operations that they’ve been doing for awhile.

So there’s one that is competitive dimensions around it, but also again it doesn’t seem to intimate that they are creating an Internet from satellites. It seems to be intimating that they might be figuring out stuff around imaging, around location based services and other things. That would make much more sense if you look at a little bit at the composition of the team. 

At the end of the day these are just rumors. It’s likely that Apple’s doing something significant about this. It’s unclear whether this will see the light of day or not. It might just be a skunkworks project, research and development, never really see the light of day. But still very interesting news.

Bertrand: Indeed. Indeed. It’s worth, following that as much as we can. Even it’s a secret team on a secret project…

Nuno: It’s a secret team, but we know the leaders of the team.

Bertrand: Thanks to the Internet.

Nuno: Yes. 

iFixit controversy (43:17)

Bertrand: Another topic, Walt from Mossberg , gadget journalist of fame, was tweeting about this article from iFixit and that he found outrageous, and I agree with him. 

I totally agree, iFixit is complaining about the activation lock for Macs. Thanks to new macOS, new macOS Catalina, if you have a pretty recent, modern, Mac with the T2 chip inside, basically you are able to fully lock your Mac, and if you are not able to unlock it with your fingerprint or your password, your Mac is inoperable. 

It’s like your iPhone, your iPad, it happened a few years back, because there were too many stolen iPhones and iPads, and actually there were pressure from different police departments in different countries for manufacturers to change that. It was becoming a true problem, people were getting stolen their phones, they were attacked to get the phone. And so basically it was a public safety concern that push to this change. And I am very happy because now you have much less risk of getting your gear stolen because people know it’s useless.

So I was pretty shocked because it’s iFixit business to actually do this type of repair on device, but at the same time, they don’t seem to care, to care at all about the safety of the user, who can get attacked, who can get stolen, they don’t seem to care about the privacy of the information on your device. All they care is maybe to sell more of their own repair services, even if it means, millions of device are going to get stolen as a result of that. So, sorry, I might feel a bit angry, but I don’t feel they were right with  their analysis.

Nuno: And I agree. I agree with you. This is a topic that’s actually very close to my heart. While at the GSM association , one of the first deals that I worked on was really in the creation and then deployment of the central equipment identity register, the CEIR, which was the global equipment identity register.

And then in trying to gently push or get telcos to adopt the equipment identity registry architecture, which in a very simplified manner, what it allows you to do, is to basically white list, black list or gray list devices. So all devices have a unique identifier called the IMEI number, by which they’re uniquely identified globally.

So when Apple deploys a device, it has its unique IMEI and your IMEI is different from mine. And so if my phone were to be stolen, I could in principle go to my carrier and my telco and say, it’s been stolen, can you please make sure that it’s de-activated on your network. Now the problem with that, is a lot of telcos didn’t have equipment identity registers, which is shocking.

It’s not the case in the US, the US did have, from what I recall, certainly the big carriers did. But in other parts of the world, they were not there. Carriers weren’t tremendously incentivized, in certain parts of the world to deactivate phones because they were really making money on the time that people spend on their networks, not on the devices themselves, in some certain countries in the world.

And so, although I think what we did was a worthwhile endeavor and really pushing the EIR globally , it wasn’t enough. And I think Apple just said we need to come up with something different because people are being attacked and their phones are being sold. So I totally agree that activation lock makes sense.

That, all the services that have been created around this, that have since propagated also to the Android ecosystem are positive.

And although there are pains around it and some activation locks might be unduly used, et cetera, et cetera. I do think that this is a worthwhile endeavor the industry. 

And unfortunately the telcos didn’t sort it out when they could. And so it’s now to the OEMs and the consumer electronic firms to try and figure it out. So again, agreed with Walt that this article is really a very passive aggressive article with not a lot of data.

Bertrand:  Yes. Actually that was one, if not the best feature of macOS Catalina. Is that additional level of safety on your device, and that benefit again on the long term, that people will just learn that there is no point in trying to steal a laptop anymore.

Nuno: Yes.

State of the Tablet Market (47:20)

Bertrand: To go on, an interesting market research report on the state of the tablet market…

Nuno: Where Apple seems to be doing at least on paper less well.

Bertrand: Yes. Well in the sense that it’s not decreasing in market share. Where most of their competitors are decreasing. From Samsung, to Huawei, to the segment called “Others.” But, two are doing pretty well, but especially one has been doing crazy well year over year. And we are comparing Q3 2019 with Q2 2018. It’s Amazon. Amazon share of market has grown by 141 percent. So very significant increase. Positioning Amazon as a number two manufacturers of tablet. Right after Apple.

Nuno: So this is year on year Q3 2018 to Q3 2019. And as you mentioned,  Amazon has grown in shipments 141%, which is significant.

And from a market share of, as you said, 5.6 to 13.9, 

Bertrand:  I think we are not exactly comparing the same devices.

Amazon has smaller devices that’s their focus, yes they have 10-inch devices. I’m pretty sure that’s not the ones selling more. They have 7, devices,  probably selling the more. And they are also very cheap. We are talking about $100 plus device, versus Apple where the cheapest one is $300.

So very big difference in price, and also pretty big difference in use. Amazon device, I’m pretty sure that many of them, are bought actually, either by  kids, young kids, because you don’t want them to break an Apple device. [laughs] It would be too expensive to replace, but with an Amazon cheap device, it’s less a big deal. And sometimes it might be by people who are really not sure they are going to use this tablet device much. So they are not willing to make the move to a $300  device.

Nuno: But in terms of totals, it does seem there’s a contraction of the tablet market, year on year, and there’s shipments in Q3 2019 38.2M versus 39.7. So if we believe the numbers from Strategy Analytics, there’s a contraction market. 

So we’ve reached peak tablet space. There isn’t a huge amount of innovation. There aren’t ridiculous shipments. So as a category, it’s flattening out. 

Bertrand: Yes, I think we reached a peak market for tablets actually many years ago. I forgot, 2014, 2015, so we are already much, much lower than that. But you’re right, it’s a very small contraction. On the positive side, I was impressed by the launch of the latest, entry-level iPad. At $300 plus, $320, now you finally have a clean integration with the keyboard. Before you had to use a Bluetooth keyboard. Now, even the entry level tablet can use an integrated keyboard as well as a pencil. 

So only the iPad Mini, in the whole lineup, doesn’t have a keyboard, and given the size of the iPad mini, it’s not crazy, I mean, we’ll see. Maybe it will get one at some point. But it’s not where it was most needed. 

So my point is that I feel the roundup of their tablet line is very impressive. I mean, you have an entry level iPad, you have an iPad Mini, you have an iPad Air, you have two size iPad Pro. It’s a very full, very detailed, very advanced lineup, you could argue as advanced, and as segmented as their Mac lineup, at this stage. So it’s a very optimized lineup. And very powerful, I as a reminder, if you take Apple devices, many of them are able to very, very well, fight an equivalent, PC or Mac in terms of processing power, these days .

Nuno: But somehow laptops haven’t fully disappeared. So it seems like tablets have been in the middle. They are content consumption devices maybe used for purchasing of online goods, when you need a little bit more screen at home, maybe as a second screen, but they really haven’t replaced laptops in some ways. And obviously they haven’t replaced at the other end, smartphones either. So there are sort of stick in the middle, obviously more nichey category, as we’re saying, they’ve plateaued, around 30 to 40 million or 35 to 40 million in shipments. Obviously this is Q3, Q4 will likely be higher because obviously it’s Christmas, et cetera. But it just seems like a niche play. It’s sort of fits the market. It’s well understood, but it’s not going to be the replacement of laptops.

I know you have different views because you like certain devices that are quasi tablet devices like the Surface and they’ve done very well, etc. 

Bertrand: I like a lot of devices. PC, tablets, and Chromebooks, and whatever. But first thing I want to highlight that Apple launched the new iPad OS as well, in September. And this is a big evolution. You finally have a way, way more powerful operating system for  iPads that let you do way more than before. You can connect external devices, external storage systems, much more easily than before. You have a full-on, Safari desktop-class browser, you have a lot of improvement basically. So my point is that, it was not just the hardware, the software was actually the limiting platform. Which was a surprise for Apple devices. And I think they’ve finally fixed it. So it will take a while for consumers to really understand and that, “Hey, you know what, actually I can do way more, therefore this investment is more valuable.”

And my point that I think it will move a bit more from a pure consumption device to a bit more of creation device. But at the end of the day, if you want it to be truly a content creation device, you will have to add a mouse, you will have to add an external screen support, you will need to have  a lot more things, and at some point, let’s call it a Mac, or let’s call it a PC. So I think it will stay separate categories with different needs, trying to answer and solve different types of use cases. 

But where I agree with you is that I don’t see a dramatic change in shipments, next year. Even, with that new operating system.

Nuno: I don’t either. In some ways it will be: “I haven’t bought a tablet in a long while, maybe it’s time for me to buy one”.  But I do feel it sort of serves as a second screen, third screen type option. And given the fact that I already have a smartphone that has a pretty large screen that serves as a second screen, then where does it fit?

So I don’t know. I’m a little bit more bearish on the tablet market than I was before. I do agree there is potential for the convergence of that market with the more content creation and productivity market that the laptops are serving today. But remain skeptical. 

Bertrand: It’s a third screen, I agree with you, it’s a third screen. Usually you have a smartphone, that’s for sure, the table stake. Then you probably have a PC, if you have to do some more serious work. And then, for some light entertainment, yes, a tablet make a lot of sense. 

Nuno: Indeed

Bertrand: Thank you Nuno. 

Nuno: Thank you.